Affliate title Buyouts spoke to three senior private equity investment executives from Carlyle, Blackstone and Ontario Teachers’ Pension Plan about the prospects for the year ahead. Here is what they said about ESG, diversity and the energy transition.
On the panel were Joe Baratta, global head of private equity at Blackstone and a member of the firm’s board of directors; Brian Bernasek, managing director and co-head of US buyout and growth at Carlyle Group; and Karen Frank, senior managing director and global head of equities at Ontario Teachers’ Pension Plan.
Will private equity make new inroads on the ESG front in 2022?
Joe Baratta: I think ESG has been a journey. What is expected of private equity GPs, rightly, by our LPs has increased. Our ability to report on the progress we’re making is improving and it’s a necessity. I think we’ve become more organised around it. Now we’re putting into place specific programmes to drive a specific set of results. And we need to continue to create a robust reporting and monitoring structure.
One area where we’ve been slower is: how do you have more diverse and equitable recruiting practices across portfolio companies with the objective of over time having more diverse workforces and management teams? The way we’re tackling that is by looking at the basic recruiting processes – the schools from which we recruit, the academic requirements for certain roles, working with community-based organisations to find underrepresented groups from which we can recruit.
“The industry for a long time recruited from the same dozen schools, the same majors, and that creates a pretty small pool. We expanded the number of schools, the types of majors and the backgrounds of candidates that we interview and want to access”
Karen Frank: For us, this has become a gatekeeping issue. E, S and G are all important to us. If we don’t have commitments or visibility on how either funds or portfolio companies are leaning in, it gives us real pause for thought. We have a lot of data points to realise that diverse organisations, ones that are aligned with ESG, deliver better and sustainable returns to their shareholders. Not every company, not every situation, will be on the same trajectory, but we expect positive movement toward each of these goals. That is one of things that helps to support our investment case.
Despite COP26 [the 2021 UN Climate Change Conference] and the urgencies raised there, I think we’re still early days in how the industry leans in on the environment – in terms of influencing portfolio companies, allocating investments and investing in solutions. We’re still some ways away from doing it effectively or fully understanding what good looks like.
Brian Bernasek: We have made progress on ESG as an industry but there is a lot more to do. There is an old adage that you get what you measure. We’re focusing more on metrics [through the ESG Data Convergence Project, led by Carlyle and CalPERS] and encouraging the industry to do so as well.
In our experience, businesses and management teams that embrace ESG are more thoughtful, more innovative and move aggressive. They are the teams that we want to partner with.
Is private equity doing enough to ensure diversity in its own ranks?
Karen Frank: I joined an organisation where I’ve been pleased at the commitment to diversity. Women, for example, are well represented on the board, the executive team, in asset group leadership and on the investment team. Private equity has been focused on getting bigger intake but has yet to see all forms of diversity, including at the leadership level. That will be something important for us to break through on a more industry-wide basis.
“Climate change is one of the most pressing issues of our time, and it is vital for us to see both the opportunities and the challenges. It is a market factor that has to be considered seriously in our industry”
It’s a long road, but one where we’re starting to get critical mass. We know the inherent benefits of diversity. I’m also keen that we open up the aperture. We can’t just be talking about women; we need to be talking about all forms of diversity, equity and inclusion. The more progress we make, the more time and voice and mindshare we give to that, the more likely, I think, we’ll eventually get there.
Brian Bernasek: We have made so much progress on the diversity of our teams – more than half of our assets under management are run by women. There is tremendous value in sitting around a table or being on a Zoom call with a diverse group and background of experience. That is helping us make better decisions today than we did a decade ago.
Joe Baratta: The industry for a long time recruited from the same dozen schools, the same majors, and that creates a pretty small pool. We expanded the number of schools, the types of majors and the backgrounds of candidates that we interview and want to access. Our new hires on the investment professional side and on the portfolio engagement side are approaching 50 percent female and diverse candidates.
“The industry is evolving very quickly. The way private equity will engage in climate and energy transition is probably going to accelerate because those opportunities are becoming more clear and more accessible”
Ontario Teachers’ Pension Plan
Will the energy transition be a larger priority in 2022?
Brian Bernasek: Climate change is one of the most pressing issues of our time, and it is vital for us to see both the opportunities and the challenges. It is a market factor that has to be considered seriously in our industry, which is why, among our activities, we’ve carbon-footprinted close to 100 percent of majority-owned companies in primary private equity strategies globally.
Karen Frank: We recently announced our commitment to net zero [in the portfolio by 2050, with 2025 and 2030 interim targets]. For us, it’s not about carbon-dumping. Some of the more recent investments we’ve made involved backing companies and management teams to help get to that transition. We’re in some cases taking on carbon, but only in circumstances where there is a transition plan to ensure we’re getting the business to a low-carbon environment.
In terms of the ability of private markets to put weight behind the technologies and capabilities that will help us crack this problem, I think there is a real opportunity. The industry is evolving very quickly. The way private equity will engage in climate and energy transition is probably going to accelerate because those opportunities are becoming more clear and more accessible.
Joe Baratta: The energy transition is a certainly a priority for us. Our job is to make the companies we own better and if they are generating carbon emissions to reduce them. We recently made a definitive target to reduce emissions by 15 percent in aggregate across our new control investments where we control energy usage.